Student Loans and Bankruptcy

The number of students facing student loan debt has increased manifold. Education has become expensive and it is not possible for everyone to finance it. It has resulted in large number of student loan debts. However, it is not all bad news. Now there are various ways to deal with student loans. Even when a student is under default and facing bankruptcy, there are effective measures that help rehabilitate the student loan.

Know the Type of Loan You Have Borrowed

This is the first step in determining if you are eligible for loan relief consideration. There are differences between private loans and federal student loans. Federal loans for students give the borrower various options and rights. The rights depend on the type of federal loan you have borrowed. Most rights and options are consistent across various federal student loans.

Private loans, on the other hand, have their own specific terms as specified under the original contract. Every bank has a different set of terms and conditions for these student loans. Same bank may have different conditions for different type of borrowers. The database on National Student Loans is a good place to find information. All types of data related to the student loans, balance, current status and other details are available. Information on private student loans is not listed in this database.

Various Options

Students need to know an important thing related to the student loans. It is possible to discharge a student loan in time of bankruptcy. At the same time, it is a very difficult process. Statute of limitations is not available for federal student loans. Statute of limitations varies in case of private loans. Most borrowers will find it very difficult to avoid student loan repayment when filing for bankruptcy. Waiting for the expiry of statute of limitations is not easy either.

Options available for federal student loans depend on the current status of the loan. If it is still in default and has not been paid for 270 consecutive days, then there are various repayment options. Forbearances and deferment options may also be available.

Discharging Student Loans

There are various options open to borrowers for requesting a discharge of their loan. In case of the death of the borrower, the loan is discharged after current loan servicer presents the death certificate of the borrower. In case the student dies, parents can apply for complete discharge if it is a parent plus loan. The borrower can be allowed to discharge the loan if he or she becomes permanently disabled. There are various requirements to fulfill but this can be a good option to discharge loan for some borrowers.

There is a program for public loan forgiveness for individuals working in public services. Borrowers can apply under this program if they can make 120 payments on the loans. They must be eligible for the repayment plan. The remaining balance can be written off.

Repayment and Deferment Plans

Borrowers facing financial problems can apply for deferment and forbearances program. The person not able to find proper employment can apply for this option. At the same time, it is important to note that both these options are generally temporary. There are various repayment plans that consider the income of the borrower. These repayment plans take into account the financial situation of the borrower. In both these plans, there is change in payment amounts based on the financial change of the borrower. There is some flexibility in case of tight finances. The repayment period can go up to 25 years. If the loans are not cleared by that time, the remaining debt is written off. However, in such a case, there are tax implications.

It must be remembered that in these repayment options, the borrower will be paying larger amount toward accumulated interest compared to the 10 year standard repayment plan.

What Happens When the Student Defaults on the Loan?

When this point is reached, the account is handed to a debt collection agency. There are 23 private debt collection companies in contract with Department of Education. These agencies collect student loans that have been placed under default status.

Many bad things are going to happen once you have defaulted on your student loan. You will become ineligible for a repayment plan. You will be unable to opt for forbearances or deferment plans. Department of Education reports the default to the credit bureau. Once the student loan has been placed under the default status, it goes to a collection agency. The collection fees set by Department of Education starts at 16 percent of the principal amount, interest and all fees that are already owed.

Federal student loans can also be collected through the income tax refund and wages. The borrower receives a notice before any such directive is implemented but there is no need for a judgment in these steps. Some issues can be handled better with the help of a student loan specialist attorney.